Iron ore is being undermined by slowing steel demand

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A recent Reuters article looked at the seaborne iron ore market and suggests robust demand from China is offsetting weak demand from the rest of Asia and Europe, leaving a largely balanced global seaborne market.

As a result, the article suggests fear over supplies from Brazil is providing price support. The iron ore price hit an 11-month high earlier this month at $112.40/ton, up 39% from a low of $79.60/ton on March 23 at the height of the coronavirus pandemic in Asia.

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China’s iron ore imports rise, other countries see declines

The article states China imported 101.68 million tons of iron ore in June, a 33-month high. China’s  imports in the first half of 2020 totaled 546.91 million tons, up 9.6% over the same period in 2019.

But imports in South Korea fell from 7.03 million tons in June 2019 to 5.32 million tons this year. Likewise, Japan imported 5.08 million tons, down 37.3% from June last year.

Europe was even more dire, with seaborne imports collapsing 55.7% in June from the same month last year to 5.09 million tons.

On balance, though, China’s strength offset the rest of the world’s weakness to leave global imports at 118.69 million tons in June, little changed from last year’s 118.55 million tons.

Concerns over Brazil output

Price support has come from fears Brazilian output would be hit by the rampant spread of the virus in the country and hitting the world’s largest iron ore producer, Vale.

So far, those concerns have not actually been realized.

Output was up 5.5% last quarter from a year earlier and up 13.4% from the first quarter before the virus began to take off.

However, believing iron ore and associated steelmaking products — like coke and coking coal — are going to remain at elevated levels though may not be warranted.

MetalMiner’s tracking of iron ore and coke prices in China have shown recent weakness. Reuters cautions falling prices and rising inventory for finished steel products portend weaker demand.

A disconnect between input costs and output cost rarely lasts for long. With plentiful raw material supply, there is little to support steelmaking material prices in Q3.

Reuters reports steel rebar prices on the SHFE fell 1.1% to 3,747 yuan per tonne and hot-rolled coils ended down 1.1% to 3,767 yuan per ton last week. Total stockpiles of five main steel products at mills and held by traders stood at 22 million tons, up 1.7% from the week earlier. Steel rebar stocks jumped 13% in the past five weeks as demand has been hit by slowing construction activities due to floods and heat, Reuters reported.

These are not dramatic changes, but they are suggestive of a gradual easing of demand and rising inventory.

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Seaborne iron ore, coking coal and coke prices appear to have more downside risk than upside this month.

As such, all it will take is for investors to lose faith and take profits for a sharper correction to follow.

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